Your are here: Home» Publications» Working paper


Outward FDI and Domestic Input Distortions: Evidence from Chinese Firms


E2016001                                                           February 2016

Cheng Chen, School of Economics and Finance, University of Hong Kong. Email:

Wei Tian, School of International Trade and Economics, University of International Business and Economics, Beijing, China. Email:

Miaojie Yu, China Center for Economic Research (CCER), National School of Development, Peking University, Beijing 100871, China. Email:


This study examines how domestic distortions affect firms’ investment strategies abroad. The study first documents puzzling empirical findings concerning Chinese multinational corporations, which include that private multinational corporations are less productive than state-owned multinational corporations. A theoretical model is built to rationalize these findings and yields additional empirical predictions that are consistent with the initial empirical findings. The key insight is that discrimination against private firms domestically incentivizes these firms to produce abroad, which results in less tough selection into foreign direct investment for them. A calibration exercise shows the quantitative impacts of domestic distortions on gains in aggregate productivity after investment liberalization.

Keywords: Outward FDI, Multinational Firms, Institutional Distortion

JEL: F13, O11, P51.

Download the full text E2016001.pdf